Businesses Should Fear States' Pension Debts

July 16, 2013

In late June the ratings agency Moody's issued a report recalculating states' pension debts using more conservative metrics than the states themselves apply, says Steven Malanga, an editor for Real Clear Markets and a senior fellow at the Manhattan Institute.

Whereas states claim they've funded about 74 percent of the promises they've made to workers, Moody's found that the median pension funding of states was just 48 percent of the money needed to pay off those promises.

Moreover, 10 states had pension debt equal to 100 percent or more of their current annual revenues.

Governments are now in unprecedented territory with the pension mess, and it's not clear how it will all play out. As the Moody's report suggests, there's not even a consensus on how much states owe.

Businesses should see this as a warning, as they are a convenient target for politicians looking to stem the rise in taxes on individuals, and also moderate the cuts to basic services prompted by rising retirement costs. Indeed, some businesses are starting to figure out that their decisions on where to expand, relocate or otherwise invest their resources have to take into account the staggering debts that some states and cities have accumulated, especially since the retirement debt burden is not dispersed equally across the country. Some states are in far worse shape than others.

One troubling component of the uncertainty is that some state laws give government pensions unusual protections.

Whereas in the private sector employers are free to alter solvent retirement plans as long as they don't eliminate benefits already earned, government workers argue that once they become vested in a public pension plan, they have the right to continue earning benefits at the same level for as long as they work.

Courts have sometimes sided with workers.

Some state governments have switched from merely trying to collect taxes on in-state business to extending their tax arm as far as possible. That means firms with a single telecommuter in a state are being dinged for corporate income tax claims, as are firms with no physical presence in a state other than a website hosted on local server.

Indebted states must eventually become money-grabbing states, if they aren't already. Businesses that haven't learned that lesson yet will learn it the hard way.